Although the magnetic card is widely used as a means of furnishing services, purveyors of these services are made uneasy by the increasing fraud in connection with services furnished because of stolen or counterfeit cards.
The disadvantages of magnetic cards will be better understood from a brief review of the manner in which a service is provided with a card with a magnetic track, taking a payment card as an example.
First, proof that a transaction has taken place between a customer and a vendor takes the material form of an acknowledgement or receipt, on which the following information, in particular, is written: the amount of the transaction and information that identifies the customer (name, account number, etc.), picked up directly from the card (using the magnetic track and/or information embossed on it), and information identifying the vendor. After signature by the customer, the duplicate of the receipt is given to the customer as proof, and the original is transmitted by the vendor to its bank.
Second, the bank commences a series of operations, based on the information written on the receipt, to debit the customer's account by the amount of the transaction and credit the vendor's account by the same amount. Once the debiting and crediting operations have been completed, the transaction is validated.
From the above description of a transaction, two statements can be made:
1. The vendor has no means whatever at its disposal for detecting a stolen or counterfeit card at the moment when the transaction is made, and
2. the bank has no means whatever at its disposal for proving, simply by examining a receipt sent by a vendor, that the corresponding transaction has been made using a stolen or counterfeit card.
Thus in the majority of cases, a fraudulent transaction cannot be detected except by the customer, either after discovering his card has been stolen or after his account has been debited for the amount of a transaction he never made. The bank will then open an inquiry, but the results of that are never available immediately.
Meanwhile, to reduce the number of fraudulent transactions, the vendor can, as a control, verify that the name embossed on the card is the same one written on some other piece of identity presented by the customer. This kind of control does dissuade those committing petty fraud, but not experienced swindlers. A second control is to verify that the number embossed on the card is not included on a blacklist regularly updated by banking entities. These controls are not effective for a card that has not yet been reported stolen or for a counterfeit card that has not yet been detected.
A solution to this problem is to have all the operations, from the request for a service to the furnishing of the service, to be monitored, verified and executed all at once. But, such a solution requires relatively expensive equipment.